A New Way to Think About Office Lighting

Executive Summary

U.S. buildings consume nearly three-quarters of the country’s electricity and are responsible for 39 percent of all greenhouse gas emissions. The technology exists to revolutionize commercial lighting: LED bulbs and today’s intelligent digital controls systems can together provide higher quality indoor environments, while saving significant energy and money. However, everybody wants a better lighting system, but nobody wants to pay for it. Owners don’t want to spend their capital budgets, especially where tenants pay the utility bills. Tenants don’t feel empowered to invest in capital projects, especially when their leases are short term. Hence the opportunity for third-party service providers. We believe that a recent business-model innovation will overcome this barrier and upend commercial lighting and other energy services. Third-party ownership models, which separate the ownership of an asset from the service it provides, have transformed other industries for the better. For example, your company probably doesn’t own its copy machines. Instead, they are owned by a company such as Xerox, which has a service contract with your company based on your needs (e.g., number of copies each month). Lighting is a perfect candidate for this sort of innovative service contract. Lumens-as-a-Service might be just the tip of the iceberg of other new as-a-service offerings, such as heating and cooling, which can drive new investment into building performance. Because when you start asking, “what do I need from my equipment?” rather than, “what equipment do I need?” you’ll start looking at your building in a whole new light.

Most offices have adequate but aging lighting systems that often operate inefficiently, can waste vast amounts of energy, and annoy employees. Wasted electricity, excessive or uneven illumination, and difficulty concentrating are three top complaints of office workers. More significantly, increasing awareness about the building sector’s growing role in climate change is shifting tenant and investor preferences and influencing owners to improve the performance of their buildings to stay competitive. U.S. buildings consume nearly three-quarters of the country’s electricity and are responsible for 39% of all greenhouse gas emissions.

The technology exists to revolutionize commercial lighting: LED bulbs and today’s intelligent digital controls systems can together provide higher-quality indoor environments while saving significant energy and money. However, even though LEDs are fast becoming the go-to home lighting product because of their long life, energy savings, and precipitous cost decline, LED retrofits in commercial buildings remain a nascent industry, with $63 billion in market value untapped.

Basically, the problem is that everybody wants a better lighting system but nobody wants to pay for it. Owners don’t want to spend their capital budgets, especially where tenants pay the utility bills. Tenants don’t feel empowered to invest in capital projects, especially when their leases are short term. Hence the opportunity for third-party service providers.

We believe that a recent business-model innovation will overcome this barrier and upend commercial lighting and other energy services. Third-party ownership models, which separate the ownership of an asset from the service it provides, have transformed other industries for the better. For example, your company probably doesn’t own its copy machines. Instead, they are owned by a company such as Xerox, which has a service contract with your company based on your needs (e.g., number of copies each month). Lighting is a perfect candidate for this sort of innovative service contract.

Lumens-as-a-Service

When LEDs are paired with smart controls, the new “as-a-service” model becomes a realistic possibility. Advancements in control technology have unlocked the ability to monitor, manage, and control LEDs remotely, which is a critical (and until now missing) element in enabling an as-a-service contract. The ability for remote monitoring and control enables true service contracts that are structured around selling an outcome — in this case lumens, a measure of light intensity in a space — which Rocky Mountain Institute calls “Lumens-as-a-Service” (LaaS). Importantly, this advancement in controls technology allows the lighting system to be controlled, owned, and operated by a third party, shifting the investment off the building’s balance sheet.

How It Works

Similar to other as-a-service models, LaaS allows a customer to “rent” its ceilings to a service provider. The customer specifies the outcomes it requires from its lighting system (e.g., lighting levels) and the service provider designs, installs, and maintains LED lighting with smart controls to provide those outcomes.

The service provider pays a fixed monthly rent to the customer for access to the ceiling space within the building. This fee is set up front, based on the available economics of the project. In exchange, the service provider receives its revenue for the installation and services provided through the customer paying the service provider the full value of the lighting energy savings realized over the term of the agreement.

This approach fully aligns the benefits and risks of the upgrade with the roles and preferences of each party. Customers receive their share of the savings in the form of a fixed rent for the term of the agreement, along with the indirect benefits of a higher-quality lighting system. Service providers bear the performance risk, as they are paid the calculated lighting energy savings realized over the term of the agreement. They receive compensation appropriate to this risk assumption and have the indirect benefit of higher sales through greater uptake of lighting upgrades.

The LaaS model is a game changer in the way it aligns and incentivizes both service providers and customers to deploy the most energy-efficient lighting systems available, not only creating an immediate boost in net operating income for building owners but also saving significant amounts of energy and taking a big bite out of the building stock’s carbon footprint.

When successfully deployed at scale, LaaS might be just the tip of the iceberg of other new as-a-service offerings, such as heating and cooling, which can drive new investment into building performance. Because when you start asking “What do I need from my equipment?” rather than “What equipment do I need?” you’ll start looking at your building in a whole new light.

Iain Campbell is a managing director in the buildings practice of the Rocky Mountain Institute, a nonprofit think-and-do tank focused on cost-effective, market-based, low-carbon energy solutions.

Koben Calhoun is a manager in the buildings practice at The Rocky Mountain Institute, a nonprofit think-and-do tank focused on cost-effective, market-based, low-carbon energy solutions.

James Mandel is a principal at Rocky Mountain Institute, a nonprofit think-and-do tank focused on cost-effective, market-based, low-carbon energy solutions.